401k thread inspired by Russ

[AZCB34]

Russ had an interesting story in P&R about a friend who had no clue what she was invested in and had no desire to even figure it out.

I work in the investment industry and specifically with retirement accounts. It is standard on a daily basis. I speak to people who have no clue what they are invested in and no desire to even learn. They just want to be told what to do. They know they need to save and invest but that is where the desire ends. They convince themselves it is complicated but target date funds remove all the complication...and yet they cannot be troubled.

I am instilling as much knowledge I have in my boys without overwhelming them and getting them to stay saving for retirement now while they are in their teens. I hope I am providing then with a solid foundation...one that I never got even though my dad led a comfortable retirement.

Education starts at home but when the parents don't understand how and what to do, how can they prepare their kids?

 

[AZCrazy]

Success isn't a right. The bell curve of financial success directly correlates with financial intelligence and effort.

 

[AZCB34]

Success isn't a right. The bell curve of financial success directly correlates with financial intelligence and effort.

I agree but how can we get the current and future high school generations to put in enough effort to achieve success? The current emphasis on a financial class isn't going to do it because it is a throwaway half semester social studies class for seniors who are coasting the last year. There certainly isn't money to expand the efforts to make this real life necessity a reality.

 

[dreamcastrocks]

Success isn't a right. The bell curve of financial success directly correlates with financial intelligence and effort.

It also correlates with the financial success of your parents. Success begets success. Currently, it is more important that you grow up in a family that had success so you yourself can have success. Yes, of course there are exceptions, but you almost always need money to make money.

 

[Russ Smith]

I agree but how can we get the current and future high school generations to put in enough effort to achieve success? The current emphasis on a financial class isn't going to do it because it is a throwaway half semester social studies class for seniors who are coasting the last year. There certainly isn't money to expand the efforts to make this real life necessity a reality.

I mentioned that a couple of weeks ago have a 21 and 17 year old niece who don't understand 401K at all, didnt' know what it was. Don't understand stocks, don't have any financial education. One is a junior at Davis, the other has a above 4.0 GPA(AP classes) and is probably going to UC San Diego, both very smart kids but they do not get that education in HS or college apparently.

As for the success isn't a right, this again goes back for me to the idea that we as a nation are better off if people aren't in financial distress. That doesn't mean give them money it means if we put people into funds that figure to perform better based on past, it's GOOD for the country as a whole. We don't gain anything if they are unable to pay for themselves, but if we try and push them into better performing funds by making them defaults, 20-30 years from now they're presumably in better financial shape and less likely to be a "burden" on society.

 

[Ouchie-Z-Clown]

Russ is 100% correct. Many organizations (mine included) are rolling out financial wellness programs to their clients’ employees. A lot of companies want more people to save for retirement but have realized that financial illiteracy has placed too many priority financial hurdles in the way of effectively saving for retirement. Most people don’t even have a $1,000 emergency fund much less a plan to lessen debt (student and otherwise), save for a house, save for retirement, etc. and studies have shown that (a) employee’s spend an inordinate amount of time at work either dealing with personal financial matters, planning, or worrying about their financial situation, and (b) that these financial worries create a less stable workforce and deteriorating health of the workforce which in turns results in greater costs to the employer (less efficiencies and more health costs).

So these programs are a start. But they still come up short if they’re just education because education alone isn’t moving the needle. The best programs are education coupled with advisors who are capable of assisting with the necessary actions.

 

[Russ Smith]

Russ is 100% correct. Many organizations (mine included) are rolling out financial wellness programs to their clients’ employees. A lot of companies want more people to save for retirement but have realized that financial illiteracy has placed too many priority financial hurdles in the way of effectively saving for retirement. Most people don’t even have a $1,000 emergency fund much less a plan to lessen debt (student and otherwise), save for a house, save for retirement, etc. and studies have shown that (a) employee’s spend an inordinate amount of time at work either dealing with personal financial matters, planning, or worrying about their financial situation, and (b) that these financial worries create a less stable workforce and deteriorating health of the workforce which in turns results in greater costs to the employer (less efficiencies and more health costs).

So these programs are a start. But they still come up short if they’re just education because education alone isn’t moving the needle. The best programs are education coupled with advisors who are capable of assisting with the necessary actions.

Yeah I think the concept of social engineering generally has a bad reputation but this is one instance where it shouldn't. Putting them into better funds as defaults and upping the % every year if they don't opt out may seem "pushy" but it's based on very sound information that it's better for them which is better for us as a whole. Now you don't want to be putting people into 401K's when they can't make their monthly financial obligations, they need to make THAT choice on their own first, but once they opt in the defaults should be good choices not the absolute worst available options based on total lack of risk.

There's actually a bill in Congress right now to try and improve retirement plans, i haven't seen the full bill and I understand there are some parts that are a bit "iffy" but the general idea is to make it easier for companies to provide options for their employees, and this one has very strong bipartisan support, something EXTREMELY rare in todays political climate. Everyone seems to realize that this is for the best.

I had this exact discussion with HR a few weeks after I started at my current company, it was way too easy for me to not get into the right programs, they had me sign up with Trinet but that was really it, there was no "push" to get it done, and no education. Companies tend to chicken out on that stuff we can't advise you, because they don't want to be blamed if the stock market goes down and you lose money, but you don't actually lose money until you withdraw it and the horizon for most people on that is so long, it's just not nearly as risky as some think. I think just showing people some graphs if you put X dollars in every year and then some averages over time to show them the value of being in a stock index fund or a target based fund as opposed to just the money market ones is all it should take. At the current average, money in a S&P index fund should double roughly every 10 years(using 7% as the average return). To get doubling on a CD at 3% it takes 24 years, and good luck finding a CD that pays 3% it would probably be a 5 year CD. By all means have SOME money in safer things I certainly do, but SOME retirement money should be in the markets in some form or another.

 

[Ouchie-Z-Clown]

Yeah I think the concept of social engineering generally has a bad reputation but this is one instance where it shouldn't. Putting them into better funds as defaults and upping the % every year if they don't opt out may seem "pushy" but it's based on very sound information that it's better for them which is better for us as a whole. Now you don't want to be putting people into 401K's when they can't make their monthly financial obligations, they need to make THAT choice on their own first, but once they opt in the defaults should be good choices not the absolute worst available options based on total lack of risk.

There's actually a bill in Congress right now to try and improve retirement plans, i haven't seen the full bill and I understand there are some parts that are a bit "iffy" but the general idea is to make it easier for companies to provide options for their employees, and this one has very strong bipartisan support, something EXTREMELY rare in todays political climate. Everyone seems to realize that this is for the best.

I had this exact discussion with HR a few weeks after I started at my current company, it was way too easy for me to not get into the right programs, they had me sign up with Trinet but that was really it, there was no "push" to get it done, and no education. Companies tend to chicken out on that stuff we can't advise you, because they don't want to be blamed if the stock market goes down and you lose money, but you don't actually lose money until you withdraw it and the horizon for most people on that is so long, it's just not nearly as risky as some think. I think just showing people some graphs if you put X dollars in every year and then some averages over time to show them the value of being in a stock index fund or a target based fund as opposed to just the money market ones is all it should take. At the current average, money in a S&P index fund should double roughly every 10 years(using 7% as the average return). To get doubling on a CD at 3% it takes 24 years, and good luck finding a CD that pays 3% it would probably be a 5 year CD. By all means have SOME money in safer things I certainly do, but SOME retirement money should be in the markets in some form or another.

Actually automatic enrollment is a real thing and it’s gaining traction. Instead of making people opt into a 401(k) they are automatically enrolling people at a set percentage (most common is 3%, but that’s not enough and we are seeing plans move the default deferral up into the 6-8% range). If they want they can opt out before any referrals are taken out. This has strong impacts on saving. When left to their own devices about 65-70% of people affirmatively opt into a 401(k). On average with auto enrollment about 10% opt out. That means between 20-25% of people don’t know what to do but if you default them they’ll stay and save. So plans with auto enrollment find their participation hovering around 90% instead of 70%.

As for the legislation, that’s RESA. And it’s not just the politicians that are in favor of it, but the entire industry too. But let me amplify one thing you said, RESA makes it easier for companies to offer plans. It doesn’t simplify the plans themselves for employees. This is still a good thing as it likely means more small employers provide savings plans for their employees.

 

[Russ Smith]

Actually automatic enrollment is a real thing and it’s gaining traction. Instead of making people opt into a 401(k) they are automatically enrolling people at a set percentage (most common is 3%, but that’s not enough and we are seeing plans move the default deferral up into the 6-8% range). If they want they can opt out before any referrals are taken out. This has strong impacts on saving. When left to their own devices about 65-70% of people affirmatively opt into a 401(k). On average with auto enrollment about 10% opt out. That means between 20-25% of people don’t know what to do but if you default them they’ll stay and save. So plans with auto enrollment find their participation hovering around 90% instead of 70%.

As for the legislation, that’s RESA. And it’s not just the politicians that are in favor of it, but the entire industry too. But let me amplify one thing you said, RESA makes it easier for companies to offer plans. It doesn’t simplify the plans themselves for employees. This is still a good thing as it likely means more small employers provide savings plans for their employees.

Wow. I didn't realize automatic enrollment was that common. It's not bad unless you literally can't meet your bills by losing that money but as you said in that scenario opt out.

That's actually really good, for many of these people the worst case scenario is 5 years later they leave a job and find out they have 25K in their 401K. Then you hope they get the right advice to roll it over to their new job or into an IRA.

 

[AZCB34]

A couple of things in Congress:

1. Allowing small businesses to pool together to offer 401k plans and spread out the cost: This is huge given the number of people who work for small businesses and aren't covered by retirement plans

2. I have heard there is a move to raise RMD age: I doubt this goes into effect since the government doors love their money.

Auto enrolling is good and using target date funds is also good. People being engaged in their finances is infinitely better

 

[BigRedRage]

I'm in a Target fund. I should diversify but I need to take the time to educate and I haven't even gotten my taxes in order yet

Sent from my LG-LS993 using Tapatalk

 

[AZCB34]

I'm in a Target fund. I should diversify but I need to take the time to educate and I haven't even gotten my taxes in order yet

Sent from my LG-LS993 using Tapatalk

Target funds by their nature are diversified that is what makes them so useful to the masses who don't have time, ability and/or desire to dig deeper.

Having said that, I still maintain that those who only use target date funds should still educate themselves and understand what they are in, why they are investing in that (those) and how they are going to benefit them long term.

 

[BigRedRage]

Target funds by their nature are diversified that is what makes them so useful to the masses who don't have time, ability and/or desire to dig deeper.

Having said that, I still maintain that those who only use target date funds should still educate themselves and understand what they are in, why they are investing in that (those) and how they are going to benefit them long term.

A friend used to do this stuff for a living and showed me flaws in the target and things I could improve to be a little more aggressive while young but I forgot a lot of it

I'd stay in Target but not keep everything there

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[Ouchie-Z-Clown]

Wow. I didn't realize automatic enrollment was that common. It's not bad unless you literally can't meet your bills by losing that money but as you said in that scenario opt out.

That's actually really good, for many of these people the worst case scenario is 5 years later they leave a job and find out they have 25K in their 401K. Then you hope they get the right advice to roll it over to their new job or into an IRA.

Exactly. A plan can also have a provision where someone that was automatically enrolled can get their money out without penalties within the first couple of months so those that weren’t paying attention and were auto enrolled don’t have to keep that money in the plan.

 

[Ouchie-Z-Clown]

A couple of things in Congress:

1. Allowing small businesses to pool together to offer 401k plans and spread out the cost: This is huge given the number of people who work for small businesses and aren't covered by retirement plans

2. I have heard there is a move to raise RMD age: I doubt this goes into effect since the government doors love their money.

Auto enrolling is good and using target date funds is also good. People being engaged in their finances is infinitely better

I agree with all three items! Open MEPs are a long time coming. And I’ll be shocked if the govt approves moving RMDs back to 72 (even if they should).

 

[Ouchie-Z-Clown]

I'm in a Target fund. I should diversify but I need to take the time to educate and I haven't even gotten my taxes in order yet

Sent from my LG-LS993 using Tapatalk

If you’re in a target date fund you are diversified.

 

[Ouchie-Z-Clown]

Target funds by their nature are diversified that is what makes them so useful to the masses who don't have time, ability and/or desire to dig deeper.

Having said that, I still maintain that those who only use target date funds should still educate themselves and understand what they are in, why they are investing in that (those) and how they are going to benefit them long term.

Agreed. The year selected might not even be beat for you depending on the target date fund. They are not all the same in terms of their asset allocation. For instance at age 65 (normal retirement age) so have 50% still invested in equities while others might only have 10%. Both are diversified, but with very different philosophies.

 

[BigRedRage]

If you’re in a target date fund you are diversified.

I mean diversifying further and places some money in more aggressive stock for now. I am only 36.

 

[thirty-two]

I wish I had been taught more about investing/retirement planning/personal finance when I was younger. I have been catching up in knowledge the past few years.

It wasn’t until joining this board and BIM introducing me to Dave Ramsey that I finally began to learn more about taking control of my finances, in terms of debt reduction.

When I first started my big-girl job out of college, an old timer talked to me about deferred compensation (457 plan) my company offered and told me to do it (on top of the mandatory retirement they take out automatically). I only threw in 25 bucks a paycheck in the beginning and slowly started to add more and now that I am 13 years into my career, it’s added up nicely. Wish I had put it in more when I was in my 20s, though. Time is so critical to this stuff and you wish you could go back to your younger days with the knowledge you have now.

I am a huge fan of index funds and that’s basically what my deferred comp is made up of (large cap, mid cap, small cap, international and some bonds). I am starting to read more by Jack Bogle (rip) and lurk on the boglehead forums. I also like to frequent reddit and go into their personalfinance and financialindependence forums. I also follow some personal finance blogs.

I threw in a couple hundred bucks with the Robinhood app just to try out some stocks. That stuff is a bit scary though haha so I haven’t added anymore money to it until I really feel comfortable.

I don’t want to be 65 and have nothing to fall back on.

 

[AZCB34]

I wish I had been taught more about investing/retirement planning/personal finance when I was younger. I have been catching up in knowledge the past few years.

It wasn’t until joining this board and BIM introducing me to Dave Ramsey that I finally began to learn more about taking control of my finances, in terms of debt reduction.

When I first started my big-girl job out of college, an old timer talked to me about deferred compensation (457 plan) my company offered and told me to do it (on top of the mandatory retirement they take out automatically). I only threw in 25 bucks a paycheck in the beginning and slowly started to add more and now that I am 13 years into my career, it’s added up nicely. Wish I had put it in more when I was in my 20s, though. Time is so critical to this stuff and you wish you could go back to your younger days with the knowledge you have now.

I am a huge fan of index funds and that’s basically what my deferred comp is made up of (large cap, mid cap, small cap, international and some bonds). I am starting to read more by Jack Bogle (rip) and lurk on the boglehead forums. I also like to frequent reddit and go into their personalfinance and financialindependence forums. I also follow some personal finance blogs.

I threw in a couple hundred bucks with the Robinhood app just to try out some stocks. That stuff is a bit scary though haha so I haven’t added anymore money to it until I really feel comfortable.

I don’t want to be 65 and have nothing to fall back on.

While you clearly aren't doing much with individual stocks, my recommendation is to stick with your gameplan of index funds and avoid playing the stock game. I world rather hit for average instead of a homer and 3 strikeouts. Don't let that homerun delude you into thinking you can crush major league pitching.

I am sure you won't but I have seen too many people convince themselves they could pick stocks only to get crushed.

 

[thirty-two]

While you clearly aren't doing much with individual stocks, my recommendation is to stick with your gameplan of index funds and avoid playing the stock game. I world rather hit for average instead of a homer and 3 strikeouts. Don't let that homerun delude you into thinning you can crush major league pitching.

I am sure you won't but I have seen too many people convince themselves they could pick stocks only to get crushed.

Oh definitely. Index funds is my game plan for sure. I’m perfectly fine hitting for average haha.

 

[Ouchie-Z-Clown]

I mean diversifying further and places some money in more aggressive stock for now. I am only 36.

I get it but be careful. The target date fund (TDF) that you choose (or in which you may have been defaulted) should have represented your projected retirement date, and as a result it should already be pretty aggressive. It’s entirely possibly you want it to be more aggressive - and that’s obviously your prerogative. But the TDF is an asset allocation that’s being professionally managed and based upon a ton of research (albeit managing to the “average”). So investing alongside throws off that research and in some way negates the professional management. But as long as your eyes are open and you understand your TDF then doing some supplemental investing might benefit you.

 

[Ouchie-Z-Clown]

While you clearly aren't doing much with individual stocks, my recommendation is to stick with your gameplan of index funds and avoid playing the stock game. I world rather hit for average instead of a homer and 3 strikeouts. Don't let that homerun delude you into thinking you can crush major league pitching.

I am sure you won't but I have seen too many people convince themselves they could pick stocks only to get crushed.

Yup stocks are difficult even for professional money managers. That said if you’ve got a good advisor that uses institutional level analytics you may be able to find some value with actively managed mutual funds. As 34 said, you’re looking for consistency, not homeruns. While the index funds will give you market returns a skillful active manager should give you the experience of a .300 hitter. Lots of singles like an index but with a few more doubles sprinkled in.

 

[Russ Smith]

I actually subscribe to Motley Fool Stock advisor. I made a killing via them the last few years but I realize that's becaues the market was going way up. The stocks I was in were mostly "growth" stocks which tend to do better in that sort of market. So I outperformed indexes and "safe" stocks but got out as soon as the market started to turn on the advice of my tehn brand new advisor from Fidelity. She basically said, you've done really well these last 2 years, i don't want you to lose that so get out of those stocks and into something safer. Because I had not been working I sold the stocks took the profits knowing I had low income that year and put it into a money market. I'm back in the market now with some of it but with index funds mostly. To be honest had I not sold some of those stocks are ahead of what I sold at, but most of them had sharp declines and have not yet recovered.

I felt like Motley Fool was really good in an up market but wasn't going to bet the farm on them in a down market.

At the end of the day if stock picking was easy everyone would be doing it so I'm not going to try. I figure I did quite well for awhile and probably got quite a bit lucky so quit while I'm ahead

 

[Ouchie-Z-Clown]

I actually subscribe to Motley Fool Stock advisor. I made a killing via them the last few years but I realize that's becaues the market was going way up. The stocks I was in were mostly "growth" stocks which tend to do better in that sort of market. So I outperformed indexes and "safe" stocks but got out as soon as the market started to turn on the advice of my tehn brand new advisor from Fidelity. She basically said, you've done really well these last 2 years, i don't want you to lose that so get out of those stocks and into something safer. Because I had not been working I sold the stocks took the profits knowing I had low income that year and put it into a money market. I'm back in the market now with some of it but with index funds mostly. To be honest had I not sold some of those stocks are ahead of what I sold at, but most of them had sharp declines and have not yet recovered.

I felt like Motley Fool was really good in an up market but wasn't going to bet the farm on them in a down market.

At the end of the day if stock picking was easy everyone would be doing it so I'm not going to try. I figure I did quite well for awhile and probably got quite a bit lucky so quit while I'm ahead

Smart thinking. Stock picking is incredibly incredibly difficult.